I frequently rag on California. But I love the state, was born there and have a second home in Northern California. And despite the odds, I really hope that it gets its act turned around. My criticisms of the state are similar to my thoughts on many other states from New York to Illinois (not to mention our federal government), but I know California better than the others and it represents our biggest state economy. Historically California was built by entrepreneurs from the Gold rush to the Transcontinental Railroad to Hollywood to Silicon Valley. California’s founders had to get off their rear end and move here to begin with and that self-selected a certain kind of risk-taker.
So the Golden State got off to an adventurous and successful start. But since the early 1980’s a series of policies, laws and regulations have undermined its economic foundation. These terrible decisions rarely had an immediate impact but the results have been cumulative and are manifesting themselves today in huge amounts of debt and an unemployment rate exceeding 12%. It takes time to mess up such a good thing.
As California increased its graduated state income tax for the more affluent over the years, those hit hardest didn’t move out immediately. But over time many did move out and those in other states considering a move crossed California off their list of possibilities. Those that moved out of California rarely came back. Nationally over 43% of Americans pay zero or negative income tax (for example those that receive the earned income tax credit). I don’t have the figure for California but it has got to be even higher since the percentage of welfare recipients in the Golden State is more than three times the national average.
In an effort to encourage energy conservation, the California Public Utility Commission established an inverted rate structure. In other words, the more one uses the higher one’s per-unit cost for electricity and natural gas. So a big user can pay four times as much for his last kwh of electricity as a small user pays for his last unit of electricity. Granted this may encourage the wealthy to invest in energy conservation but brings the marginal electricity rate to one of the highest in the world. And since it reduces the price for the poor, it discourages conservation by this group. The highest cost of electricity in a California home is about four-five times the highest rate in Nevada. One doesn’t pack up and leave the state after one power bill, but the impact of these bad government decisions are collective and add pressure.
Public employee unions have come to dominate government services in California. These state workers receive substantially higher wages, and far better health insurance programs and retirement programs than those in the private sector. For example where most private sector employees receive six paid holidays per year most California state workers receive12 (down recently from 14). But most importantly these union contracts reduce flexibility and make it difficult to respond to a reduction in tax revenues and to adjust the compensation of these workers when needed. Governor Schwarzenegger’s recent attempt to furlough state workers for one day every other week has just been reversed in court. So now these days off will likely end up as bonus vacation days. Nobody left the state after another state job was unionized because the results were not immediately felt during the good times. But this kind of nonsense eventually led to a far bigger budget deficit and a few more U-Haul trucks leaving the state with furniture than entering the state.
The regulations just kept getting more complex and more intrusive in California. For example, to lend money to more than one person per year (say $10 to your brother and $20 to your sister), one needs a license under the California Finance Lenders law. The private lender says “Why bother in California - I’ll go and lend in Nevada”. My non-profit made two small interest-free loans to veterans in California and the state sent us a letter ordering us to cease and desist because we did not have a state license.
But more importantly, this means that fewer loans are available to business (the real job creators) except through banks and government. This kind of dim-witted regulation does not drive out business immediately (especially when banks are actively lending). But when the banks are tightening like they are today and that private finance option is removed, a few more businesses exit the state.
For years California has enacted a minimum wage that is higher than the Federal Government. Today it is $8.00 in California while the national minimum is $7.25. Doesn’t sound like much, but if these other laws and regulations have sufficiently irritated the business manager, this may be the “tipping point” that means a few more jobs are sent to Texas.
The negative impacts of these actions take years to become visible and frequently decades to destroy a vibrant economy – like slow moving termites eating away at a wooden building. As citizens (especially wealthy, entrepreneurs and business owners) start to personally experience the bad legislation and regulation, they gradually start to leave the state. The ones that leave are on average more affluent than those that stay. So the state has quietly lost the tax and business base that the legislators assumed would sit passively and “just take it”. On average the welfare recipients stay because California has such an attractive bundle of benefits for them.
It is hard for the public and the media to understand the “cause and effect” between bad regulations and laws and their impact because there is such a lag and it is so hard to point to any one factor. From environmental restrictions, coastal building restrictions, business license bureaucracy, high tax rates, excess regulation, and high electricity rates, it all takes time to be felt. One piece of bad regulation does not destroy an economy but bad law after bad law will eventually do the trick. It has taken persistence and consistency by the California left to decimate what was once such an energetic economy. And unfortunately it will take even more persistence to undo the damage. But before California makes the tough decisions in needs to turn things around I guarantee (and I do not guarantee much) that it will seek a federal bailout.
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